An Entitlement Reform Guide

A list of changes worth the effort, if Obama is really serious.

Updated Dec. 4, 2012 12:01 a.m. ET

President
Obama
has said he wants to reform entitlements eventually, someday, after Republicans raise taxes. Republicans want the President to sign on to serious reform now as part of any deal, since AARP and the left will kill anything that isn't passed immediately.

Given the political difficulty of reforming entitlements, Republicans are right to try to get Mr. Obama's fingerprints on such a deal this year. But the reforms have to be worth it. With that in mind, we thought we'd offer a clip-&-save guide to reforms that would make a difference. None of this is commensurate with the scale of the problem, but then Mr. Obama won't sign anything that is. These changes are pragmatic and politically realistic, at least if Republicans drive a hard bargain.

• Medicare. ObamaCare exhausted the familiar Beltway gambit of squeezing down Medicare price controls for providers. (Also note that the White House offer of $346 billion in less Medicare spending is far smaller than its $716 billion ObamaCare raid.) Absent a larger reform, that leaves asking seniors to contribute more for benefits and take a larger role in their own care.

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Higher-income seniors already receive less of a Medicare subsidy as a result of a
George W. Bush
policy in 2004 and then again in ObamaCare. A third expansion of means-testing is inevitable, and one useful proposal is known as comprehensive cost sharing.

Traditional Medicare is divided into three different programs that cover hospitals, doctors and drugs. This idea would consolidate the complex deductibles and copays into one modern, unified insurance system, with limits on the wraparound "Medigap" policies that seniors buy so they pay little or nothing out of pocket. Eliminating this patchwork of first-dollar coverage would be an incentive to discipline costs, and a (very) mild version is included in the 2013 White House budget.

Republicans can also continue to refine "premium support" on the Paul Ryan model, on a smaller scale. Mr. Obama campaigned as a defender of the status quo but now that the election is over some liberals are giving the concept a second look.
Zeke Emanuel
and others at the Center for American Progress recently endorsed competitive bidding to replace some of Medicare's administered prices. The danger is that a denuded plan would give a market gloss to a process akin to Pentagon procurement, but this is a potentially helpful intellectual concession.

Another option is raising the retirement age, which is already rising to 67 in Social Security. Longevity has increased by about 10% since 1965, and most reform plans would raise Medicare eligibility to 67 from 65 by the 2020s. This doesn't reduce the deficit now but is a credible way to reduce future liabilities.

• Medicaid. Republicans may have more leverage than they think. States can opt out of ObamaCare's Medicaid expansion as a result of this year's Supreme Court ruling, and Governors are demanding more flexibility in how they manage their own programs.

Block grants are the best solution, but a deal short of that could expand and expedite so-called Section 1115 waivers that suspend "maintenance of effort" and other federal mandates and give states the discretion to innovate. Governors would receive rebates if they found ways to lower spending below their current trends.

A deal also ought to end the long-running "bed tax" scam in which states charge hospitals a fee to increase health-care spending and thus their federal matching rate. Then they launder some of the money back to the hospitals to offset the fee. This is real waste, fraud and abuse, not the talking-point version.

• Social Security. The consensus in Washington is that the retirement program ought to be decoupled from the fiscal negotiation and fixed so that it is sustainable by itself for the next 75 years. Fine, but this still means slowing the growth of benefits and making Social Security a supplement to private saving, not a substitute.

ENLARGE

President Barack Obama
Associated Press

Currently, Social Security's cost-of-living adjustment is determined by the rise of average wages, which wasn't carved in stone by
FDR.
The formula was created in the 1970s and overstates the rate of inflation and thus increases real benefits substantially over time.

Changing monthly payments to grow with prices, not wages, would resolve 75% of Social Security's financial problems. A version of this change called "progressive indexing" developed by Democratic financier
Robert Pozen
would slow the increase in future benefits for the most affluent seniors, while lower-wage workers would be held harmless.

This reform is far superior to the other idea on the table—simply replacing the wage formula with the "chain-weighted" consumer price index, which adjusts for how people change their buying habits when prices change. Some Republicans think chain-CPI is all they can get, and it is better than nothing.

But others oppose progressive indexation because it is tantamount to a tax increase, which is true. But means-testing is a train that left the station a long time ago (see Medicare above). The truth is that nobody is "paying into" a universal pension system any longer. These are now current transfer payments, and it far better to make middle- and high-earning seniors save more through slower-growing benefits and a higher eligibility age than adding more destructive taxes.

On that score, Democrats will try to lift the cap on the income to which the Social Security payroll tax is applied, currently a few clicks over $100,000. But another 6.2% hit on every dollar over that level is a dramatic departure from current tax policy, even for the modestly affluent. On top of ObamaCare's payroll "surcharges," the top marginal rate would rise into the mid-50% range. Republicans should oppose any payroll tax increase.

***

Republicans can win this debate, but they're going to have to make the case better than they've done so far. For starters, they should stop talking about "cuts" to these programs since they're not cutting anything. If Mr. Obama won't agree to even these de minimis reforms, then Republicans should let Mr. Obama own the debt crisis he has done so much to create.

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